Low credit scores holding back borrowers

Would-be borrowers who have credit scores below 620 are increasingly being denied a mortgage, struggling to meet lenders' more stringent underwriting standards, Elizabeth Duke, member of the Board of Governors for the Federal Reserve System, told attendees at the recent Housing Policy Executive Council.

From 2007 to 2012, mortgage originations for borrowers who had a credit score between 620 and 680 fell nearly 90 percent, Duke said. During that time period, mortgage originations fell only 30 percent for borrowers who had credit scores of more than 780.

According to an April survey by the Federal Reserve, lenders say they are less likely to originate a mortgage for a borrower with a FICO score in the 620 range. What's more, lenders say they are less likely to originate the loan even if the borrower has a 10 percent or 20 percent down payment too.

"The path to easier credit conditions is somewhat murky," Duke said. "Some of the forces damping mortgage credit availability, such as capacity constraints and concerns about economic conditions or house prices, are likely to unwind through normal cyclical forces."

In 2007, the median credit score was 730 compared to 770 in 2013, Duke said.